Slow Wage Growth But Soaring Profits in the Current Recovery

BY JOHN MILLER

The current economic recovery has
done less to raise wages and more to pump up profits than any of the eight
other recoveries since World War II. No wonder inequality continues to worsen,
and most people still doubt that the economic turnaround will ever benefit
them.

A recent study conducted the Economic
Policy Institute, a labor-funded think tank, reports the alarming details. Over
the three-year period beginning in early 2001, when the last economic expansion
peaked and the recession began, corporate profits rose 62.2%, compared to an
average growth of 13.9% by the same point in the other postwar recoveries that
lasted that long. Total labor compensation (the sum of all paychecks and
employee benefits), on the other hand, grew only 2.8%, well under the
historical average of 9.9%. (See Figure 1.) What's more, most of
labor's gains came in the form of higher benefits payments to cover the
increasing cost of health care and pensions, not higher wages. In fact, in 2003
median weekly wages corrected for inflation declined, for the first time
since 1996.

FIGURE 1Growth in
Corporate Profits and Labor Compensation

Source: Economic
Policy Institute, When do workers get their share? Economic
Snapshot, May 27, 2004.Data from the National Income and Product
Accounts, Bureau of Economic Analysis, U.S. Dept. of Commerce.

The extreme imbalance between wage and
profit growth in this recovery is hardly surprising. Corporate cost-cutting has
been the hallmark of this recovery; instead of hiring new workers, bosses have
squeezed more out of the old ones. Corporate restructuring, layoffs, and the
global outsourcing of both white-collar and manufacturing jobs have all made
new jobs scarce. This recovery is still a long way from even replacing the jobs
lost since the recession began in March 2001. As of June 2004, some 39 months
after the recession beganand 31 months after it officially
endedtotal employment was still down 1.2 million jobs. Every other
economic recovery, even the jobless recovery of the early 1990s, had restored
job losses and added a large number of new jobs to the economy by the
39-month mark.

Poor jobs growth has left workers in no
position to push for higher wages. Only the jobless recovery of the early 1990s
did as poorly as the current job-loss recovery at improving workers' wages
and salaries. After adjusting for inflation, wages and salaries increased just
1.1% during the first two years of each of these two recoveries, reports
economist Christian Weller of the Center for American Progress. Wages and
salaries in all other postwar recoveries, on the other hand, rose an average of
12.1% in the same period, or about 11 times more quickly. (See Figure 2.)

FIGURE 2Real Wage
Growth in Postwar Recoveries(Percent Increase over the Eight Quarters
after the Start of the Recovery)

Source: Christian Weller, Reversing the Upside-Down' Economy, Center for
American Progress, May 24, 2004. Data from the National Income and Product
Accounts, Bureau of Economic Analysis, U.S. Dept. of Commerce.

At the same time, corporate cost-cutting
measures have made for rapid increases in productivityhow much a worker
can produce per hour. For instance, in 2002 and 2003, the hourly output of U.S.
workers went up at a 5.3% pace, exceeding the "new economy" productivity growth
rate of 2.6% from 1996 to 2001. For the first time in a postwar recovery,
productivity is growing far faster than the economy.

With little wage growth, the gains from
improved productivity have gone nearly exclusively to corporate profits. But
few of those profits are getting reinvested. Relative to the size of the
economy, real investment at the end of 2003, some 10.3% of GDP, remained well
below its pre-recession level of 12.6% of GDP at the end of 2000. Weller
estimates that nonfinancial corporations are investing fewer of their resources
than at any time since the 1950s. And with little investment, soaring profits
have not translated into a hiring boom.

Only when labor markets genuinely tighten
will workers be able to press for wage gains that match those of workers in
earlier economic expansions. Until then, the benefits of this economic
expansion, for as long as it can continue without the self-sustaining fuel of
wage growth, will continue to go overwhelmingly to profits, exacerbating an
economic inequality that is already unprecedented by postwar standards.

John Miller teaches economics at Wheaton
College and is a member of the Dollars & Sense collective.